High Stakes of Transformational Bank Mergers Prompt Skepticism

Transformational mergers are business combinations that create institutions that are vastly different from the pre-transaction businesses. They’ve always been in the playbook for bank mergers and acquisitions.

But due to recent regulatory developments, transformational mergers among community and regional banks are poised to accelerate. As a result, banks should approach such mergers deliberately and skeptically, given the inherently high stakes of such transactions. Due diligence by both parties is key.

Since 2019, the number of US whole-bank mergers and acquisitions has dropped significantly. The decline began during the pandemic and continued amid heightened calls for revamping the processes federal regulators use to review bank mergers.

The Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Department of Justice Antitrust Division in September each adopted revised approaches to reviewing bank mergers. The new guidelines generally broaden the scope of the criteria they’ll consider for potential transactions, including qualitative competition factors, managerial resources of the surviving institution, and enhanced review of the transaction’s impact on the communities served by the merging institutions.

This increase in regulatory attention to bank mergers means potential acquirers must be more deliberate in choosing targets. While a “serial acquirer” may have been able to execute two or even three acquisitions per year, there’s now a sense that an acquiring bank may only be able to pull off one acquisition a year.

The recent surge in public enforcement actions against banks involved in fintech partnerships—many of which are smaller or regional community banks—demonstrates a regulatory environment that’s compelling banks across the spectrum to invest more heavily in compliance, oversight, and internal controls.

Such investment can be difficult without scale, and the inability to achieve scale is one of many factors that can drive banks to seek liquidity events such as sales.

We are beginning to see increased interest in mergers between institutions of comparable size because of the regulatory dynamics arising both from regular exam cycles and increased scrutiny of applications for approval of merger transactions. This trend is appearing across the range of regional and community banks, from smaller privately held institutions to larger publicly traded regional platforms.

For larger regional and community banks, the appeal of acquiring smaller banks in “tuck-in” acquisitions has diminished because regulatory approvals may take longer and face greater headwinds.

Instead, many of those institutions are likely to focus on acquisitions offering a “transformational” element aimed at achieving a much larger geographic footprint, diversifying the resulting institution’s balance sheet, or introducing new business lines and sources of income, for example.

This inclination to focus on bigger acquisitions rather than tuck-ins will have a knock-on effect on smaller institutions. Those smaller banks—which now face greater pressure to achieve scale, enact management succession planning, and help create liquidity for their shareholders—could face a diminished pool of potential acquirers.

Smaller institutions therefore may view combining with another small bank as an attractive option. An acquisition with a peer or near-peer can provide economies of scale to lessen overhead burdens, fill gaps in the surviving bank’s organizational chart, and help solve succession planning dilemmas.

As the surviving institution grows, it can be better positioned for a more meaningful liquidity event, whether through an acquisition by a larger institution, an initial public offering, or a recapitalization involving a new investor group.

Mergers among smaller private institutions should focus on ensuring strategic alignment for the future, including plans for integrating and transitioning executive teams. Among larger public institutions, diligence by each party should include verifying perceived opportunities and synergies, as well as making certain that the story behind the transaction will withstand investors’ scrutiny.

Banks also should consider whether the transaction would push the surviving institution above any key asset thresholds ($10 billion, for example), which could create greater regulatory expectations.

In all bank mergers, transparency with the applicable regulatory authorities is crucial. Both participants should strive to resolve any open supervisory matters before entering into a definitive agreement and should have candid discussions with their regulators before committing to or announcing a transaction.

Although several bank mergers have been announced this year that could be characterized as transformational, we’re still waiting to see how the regulatory authorities will react to these transactions considering the new merger guidelines.

Since acquirers sometimes are disclosing that newly announced transactions will close nine to 12 months after they’re announced, the consensus seems to be that regulatory approvals will take longer. This appears to be bearing out as we watch for public announcements of regulatory approvals and the completion of previously announced transactions.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Will Hooper is a partner at Alston & Bird in Atlanta representing banks, fintech companies, and other financial services businesses.

Write for Us: Author Guidelines